Group

Other intangible assets
Goodwill
£m
Software
£m
Development costs
£m
Customer contracts and relationships
£m
Total
£m
Cost:
At 1 June 2017264.920.219.387.0391.4
Additions – internally developed2.52.55.0
Disposal of subsidiaries(9.8)(3.0)(10.9)0.1(23.6)
Effects of movements in exchange rates(1.7)(0.5)(2.2)
At 31 May 2018253.419.710.986.6370.6
Additions – internally developed4.61.86.4
Effects of movements in exchange rates2.20.52.7
At 31 May 2019255.624.312.787.1379.7
Accumulated amortisation and impairment losses:
At 1 June 2017(66.2)(11.2)(9.1)(37.3)(123.8)
Charge for year(2.9)(2.7)(9.4)(15.0 )
Disposals of subsidiaries2.16.0(0.1)8.0
Effects of movements in exchange rates0.20.2
At 31 May 2018(66.2)(12.0)(5.8)(46.6)(130.6)
Charge for year1(7.0)(1.7)(9.0)(17.7)
Effects of movements in exchange rates(0.2)(0.2)
At 31 May 2019(66.2)(19.0)(7.5)(55.8)(148.5)
Net book value:
At 31 May 2018187.27.75.140.0240.0
At 31 May 2019189.45.35.231.3231.2
  1. Charge for the year includes accelerated amortisation of £4.3m (included within ISIs).

Cash generating units (CGUs)

Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. CGUs are defined by accounting standards as the lowest level of asset groupings that generate separately identifiable cash inflows that are not dependent on other CGUs. The Directors have reviewed the continuing applicability of the judgments made in the prior year in determining the CGUs within the Group and in allocating goodwill to these CGUs. Accordingly, the UK MSS (Accumuli) CGU amounting to £14.1m has been incorporated into the UK Assurance CGU as its operations have been subsumed into the UK Assurance division following its acquisition. Comparatives have therefore been re-presented to allocate the carrying value of goodwill to the respective CGU. The assessment of CGUs is a key accounting judgment as set out in note 3 of the consolidated Financial Statements.

The CGUs and the allocation of goodwill to those CGUs is shown below:

Cash generating unitsGoodwill
2019
£m
Goodwill
2018
(re-presented)
£m
UK22.922.9
North America8.48.0
Europe and RoW7.37.4
Total Escrow38.638.3
UK: professional services47.147.1
North America: professional services28.227.0
North America: Payment Software Company Inc10.09.5
North America: Virtual Security Research LLC2.42.2
Europe and RoW: Fox-IT63.163.1
Total Assurance150.8148.9
Total Group189.4187.2

Impairment review

Goodwill is tested for impairment annually at the level of the CGU to which it is allocated. In each of the tests carried out during 2019, the recoverable amount of the CGUs concerned was measured on a value-in-use basis (VIU). VIU represents the present value of the future cash flows that are expected to be generated by the CGU to which the goodwill is allocated.

Capitalised development and software costs are included in the CGU asset bases when performing the impairment review. Capitalised development projects and software intangible assets are also considered, on an asset-by-asset basis, for impairment where there are indicators of impairment. During the year, management carried out a detailed review of the capitalised product portfolio and, based on cash flow projections for the respective projects, concluded that no impairment was required.

VIU calculations are an area of material management estimation as set out in note 3 to the consolidated Financial Statements. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate. Further detail in relation to these key assumptions used in the Group's goodwill annual impairment review are as follows:

Pre-tax cash flow projections

Pre-tax cash flow projections are based on the Group's budget for the forthcoming financial year and long-term three-year strategic plans, which have both been approved by the Board.

Assumptions have then been applied for expected revenue, margin growth, overheads and EBITDA1 for the subsequent five years from the end of 2023 and 2024. EBITDA1 is considered a proxy for operating cash flow before changes in working capital. Pre-tax cash flow projections also include assumptions on working capital and capital expenditure requirements for each CGU.

These assumptions are based on management's experience of growth and knowledge of the industry sectors, markets and the Group's internal opportunities for growth and margin enhancement. The projections beyond five years into perpetuity use an estimated long-term growth rate.

Forecast working capital and capital expenditure included within the pre-tax cash flow projections are based on management's expectations of future expenditure required to support the Group and current run rate requirements.

The EBITDA1 margin % growth rate represents the average growth over five years and is considered a critical estimate by management. The table below summarises the EBITDA1 margin % growth for each CGU:

EBITDA
Margin %
Growth
2019
EBITDA
Margin %
Growth
2018
Escrow UK(4.9%)(0.2%)
Escrow North America1.6%3.5%
Escrow Europe and RoW2.1%(5.9%)
Assurance UK: professional services0.6%6.3%
Assurance North America: professional services4.2%3.3%
Assurance North America: Payment Software Company Inc(4.0%)2.6%
Assurance North America: Virtual Security Research LLC(5.5%)(6.6%)
Assurance Europe and RoW: Fox-IT10.0%12.8%

The EBITDA1 margin % growth for Fox-IT is considered by management to be appropriate for the specific industry to which the CGU operates, albeit above the long-term average growth rate of the country. Management believes this specific growth rate is more appropriate, as the CGU operates in a high-growth industry.

Long-term growth rates

To forecast growth beyond the detailed cash flows into perpetuity, a long-term average growth rate of 1.7% (2018: 2.5%) has been used for EBITDA1. This represents management's best estimate of a long-term annual growth rate aligned to an assessment of long-term GDP growth rates. A higher sector-specific growth rate would be a valid alternative estimate. A different set of assumptions may be more appropriate in future years dependent on changes in the macroeconomic environment. These rates are not greater than the published International Monetary Fund average growth rates in gross domestic product for the next five-year period in each relevant territory in which the CGUs operate.

  1. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.

Pre-tax discount rates

Discount rates can change relatively quickly for reasons both inside and outside of management's control. Those outside management direct control or influence include changes in the Group's Beta, changes in risk-free rates of return and changes in Equity Risk Premia. In context, the estimated changes in risk-free rates and the Group's Beta from last year to this have reduced all of the CGU discount rates by approximately 2.5% (2018: reduction 0.5%) except for the discount rate in relation to Fox-IT that has reduced due to specific risk factors.

The discount rates are determined using a capital asset pricing model and reflect current market interest rates, relevant equity and size risk premiums and the risks specific to the CGU concerned. On this basis, specific discount rates are used for each CGU in the VIU calculation and the rates reflect management's assessment on the level of relative risk in each respective CGU. The table below summarises the pre-tax discount rates used for each CGU:

Pre-tax discount rate 2019Pre-tax discount rate 2018
Escrow UK9.4%12.1%
Escrow North America10.6%13.4%
Escrow Europe and RoW9.2%12.3%
Assurance UK: professional services9.6%11.9%
Assurance North America: professional services10.6%13.4%
Assurance North America: Payment Software Company Inc12.0%13.4%
Assurance North America: Virtual Security Research LLC11.9%13.4%
Assurance Europe and RoW: Fox-IT13.9%14.3%

Sensitivity analysis

Sensitivity analysis has been performed in respect of certain scenarios where management considers a reasonably possible change in key assumptions could occur. A reasonably possible change in key assumptions could occur as follows:

  • EBITDA1 (as a proxy for operating cash flow before changes in working capital) is the primary cash flow driver, and a key contributor to VIU. EBITDA¹ growth assumptions were sensitised by a 10% annual fall to perpetuity, as this is considered by management as a reasonably possible change due to the estimation uncertainty relating to cost reduction and revenue growth assumptions.
  • The discount rate for each CGU: both factors inside and outside of management's control impact the discount rate and 1% is considered a reasonably possible change in assumption due to changing market conditions.

The outcome of this analysis indicated that there is headroom in most CGUs except, as in the prior year, for Fox-IT where a reasonably possible change in the key assumptions would cause the carrying value of the CGUs to fall below the recoverable amount as follows:

Fox-IT
Carrying value of assets (goodwill, development and software costs)£78.1m
Total VIU£87.0m
Surplus over carrying value of assets£8.9m
Assumptions used in the VIU calculation:
EBITDA¹ margin (average)25.8%
Change required in EBITDA¹ value for VIU to fall below the carrying amount7.0%
Pre-tax discount rate13.9%
Change required in the discount rate for VIU to fall below the carrying amount0.9%

COMPANY

The goodwill of £14.4m (2018: £14.4m) represents a transfer from investments of the value attributable to the continuing Assurance business, assets and liabilities of RandomStorm Limited, which was hived up to a fellow NCC Group subsidiary company, NCC Group Security Services Limited, in June 2016.

  1. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.